Will Technology Destroy Banks?

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Tech companies have caused massive disruption in every industry, chiseling away at entrenched stalwarts with innovative new ways of doing things. In a digital world, they hold a clear advantage. Having been born into it, they have lean, fluid working practices, and they are experienced in dealing with rapid growth and infiltrating new sectors. They are also unrestrained by the legacy systems that often encumber the competition they’re up against as they move in.

Financial services is one area where tech companies have already been making moves, but there is a still vast scope for them to grow their operations. At the moment, the bulk of their maneuvres have been in payments. Apple and Android both offer people the ability to pay for things using their smart phones, while Facebook also allow users to make payments to one another easily using its messenger platform. Many believe that plastic cards will disappear entirely in the next 10 years, not only to be replaced by smartphones, but also payment chips embedded in clothing, watches, and other items.

This should - and is - worrying banks. According to research from the Economist Intelligence Unit (EIU), fending off the threat from technology companies like Google and Amazon is their most pressing concern. Payment insights have been the most important big data stream for banks, and taking hold of it provides access to tremendous amounts of information about their user base that was previously unavailable to them.

There is also substantial demand for tech to get involved with finance amongst consumers. Trust in banks remains low, with the 2015 Edelman trust barometer finding that Technology remains the most trusted of all industry sectors at 78%. The chemicals, financial services, banking and media industry sectors continue to be the least-trusted, with trust levels less than 60% for all four. According to another recent study by banking company Fintonic, one in seven millennials believe that tech giants like Google and Apple will replace traditional banks and become financial institutions themselves, and that they will be better at it.

The motivation for offering financial services such as a payments facility is clear, and there is obviously demand there. But how far is tech willing to look to disrupt banking’s more traditional operations, such as accepting deposits and lending funds? Will we see a Google Bank in the coming years? Despite having access to the capital, a substantial user base, and the apparent demand, it is highly unlikely for a number of reasons. The central one of these is the regulatory burden that those in banking face. Technology companies have already shown themselves to be adept at circumnavigating regulatory concerns in other industries, but it is unlikely that this will fly in the financial sector, and they are likely to greatly hold back the flexible business models that tech companies prefer to operate using.

There is also an issue with profitability. Revenue sources and the narrow interest rate spread mean that banks are now taking in far less than they once were, raising the question of whether or not it would actually be worthwhile getting deeper into banking.

It is also not guaranteed that they would be successful. General trust in an industry is one thing, but it will not necessarily translate into trust with people’s money. The major tech companies are likely to continue to offer various financial services that impinge on banking’s profitability, many of which we will not have even thought of yet. As Oliwia Berdak, Forrester analyst and author of Why Google Bank Won’t Happen, notes, ‘Digital disruptors like Google are disruptive because they don’t play by the rules. Instead, they use digital technologies to deliver better or entirely new ways of meeting customer needs … often bypassing regulation and redefining a given industry in the process.’ It is unlikely that they will try and compete with the industry in terms of its core services, but banks will have to adapt quickly to keep the threat to their general profitability in check, and make sure they are working to meet the demands of a digital-only world.